海角大神

It has been a red-ink spring for American investors. Rattled by real-world inflation, shortages, and war, stock markets in the United States and around the world have stumbled. In the world of digital money known as cryptocurrency, the losses are far, far worse.

Bitcoin, the world鈥檚 biggest cryptocurrency, has lost more than half its value from November highs. Another digital currency called TerraUSD, designed to be worth $1 at all times, collapsed along with its sister token, Luna. Another so-called stablecoin, DEI, has lost its $1 peg and is now trading around 51 cents.聽

Yet, despite all this turmoil, acceptance of cryptocurrency keeps spreading. In May, a law firm based in Dubai, United Arab Emirates, began accepting payment in bitcoin and a few other digital currencies. An Italian restaurant in Wales claimed it was that country鈥檚 first restaurant to do the same. Here in Waltham, Massachusetts, Bentley University announced it鈥檚 now ready to take tuition payments in cryptocurrency.

Why would anyone trust such shaky money?

For high rollers interested in investing in cryptocurrency, as opposed to using it as a currency, the volatility has been part of the appeal 鈥� at least when prices are going up. But one key reason is also that the software technology behind most cryptocurrencies promises a revolution in finance 鈥� through efficient and secure transactions independent of the traditional banking system.

鈥淔inding ways to make [financial transactions] cheaper and faster, and finding ways to make people that are unbanked or under-banked able to send peer-to-peer value to each other, in real time, and for no cost, is going to be a game changer for economies, not just in this country but elsewhere in the world,鈥� Republican Sen. Cynthia Lummis of Wyoming said earlier this month at an online forum of the American Enterprise Institute, a Washington think tank.

Bringing money up to speed

Wait a minute, you may protest. I already can move money digitally for free and almost instantly with services like Venmo and Zelle. But that is a bit of an illusion 鈥� or a Ferrari front end on a horse-and-buggy back end, as one digital asset banker puts it 鈥� involving an advance on money that still takes today鈥檚 plodding world of government-issued cash and authorized financial institutions much more time to transfer.聽

The so-called blockchain technology behind cryptocurrencies is a radical departure. Instead of relying on central banks, it鈥檚 designed to be decentralized. Anyone can launch new digital coins without government permission. And in theory, users don鈥檛 need to trust any of the players in the system, only the technology and the assets that back it.

That trust is being sorely tested right now, as some cryptocurrencies continue to fall and as chastened investors take to social media to vent their anger or lament their losses.

It 鈥渋s definitely a time to question the trustworthiness of a lot in crypto,鈥� says Omid Malekan, a Columbia Business School professor and author of 鈥淩e-Architecting Trust,鈥� a book on cryptocurrencies that will be available in July on Amazon. 鈥淎 lot of those [digital currencies] are more hype than substance. But bitcoin has a unique value proposition because it鈥檚 like a currency that has its own built-in transfer mechanism. That feature hasn鈥檛 existed before, other than cash.鈥澛�

Still, the road to future money is proving quite bumpy.

This past September, El Salvador became the first country to make bitcoin legal tender. By law, businesses had to accept it. And the government worked hard to convince citizens to use it. It created a mobile-phone app that allowed users to trade bitcoin and dollars with no transaction fees. And anyone who downloaded the app got $30 worth of bitcoin, a considerable sum in a poor country like El Salvador. Those who used it to pay at a service station got a discount on gas.聽

In the initial rush, half of the nation鈥檚 households downloaded the app. But after spending their $30 bonus, nearly two-thirds stopped using it, according to a recent study for the National Bureau of Economic Research. Another fifth of households never even bothered to spend the bonus. This year, virtually no one has downloaded the app. And the government鈥檚 vision of giving free digital financial tools to its poor and unbanked people 鈥� 9 in 10 Salvadorans don鈥檛 have a bank account 鈥� has fallen short.聽

鈥淭he main concern people have 鈥� is trust,鈥� says David Argente, an economics professor at Pennsylvania State University and a co-author of the study, which surveyed 1,800 Salvadoran households. They prefer to use dollars; they don鈥檛 trust the government鈥檚 system or bitcoin itself.

That survey was conducted even before bitcoin and the No. 2 cryptocurrency, Ethereum, made their latest plunge. These wild swings in value discourage consumers from using them to buy things and pay bills. That鈥檚 why most Salvadorans 鈥� as well as many companies 鈥� who receive cryptocurrencies quickly convert them to dollars. Here in the Boston area, Bentley University uses a crypto exchange called Coinbase to automatically make the conversion for a small fee.

Wanted: Stability

The failure of bitcoin to act as a stable currency has attracted investors and consumers to a different kind of cryptocurrency: stablecoins, which are built to maintain the same value as the U.S. dollar or some other traditional currency. The stablecoins that collapsed in May were based on an algorithm, or mathematical set of rules. By contrast, the three major stablecoins backed by actual dollars have held their value, despite intense selling pressure.

The question not yet resolved is who will issue a stablecoin that can gain the world鈥檚 trust. It could be one of the current crop, like Tether or USD Coin. It could be another private-sector entity, like a cryptocurrency entrepreneur or a big international bank. Or it could be a central bank like the U.S. Federal Reserve. By one count, 87 nations are researching or testing the idea of issuing their own digital currencies.

Among major economies, China is the furthest along. In the past two years, Beijing gradually has been rolling out its central bank digital currency, called e-CNY and based on the yuan. The European Union鈥檚 executive branch plans to propose a digital euro law next year. Here in the U.S., the Federal Reserve Bank of Boston and the Massachusetts Institute of Technology have partnered to find solutions to the technological challenges of creating a stable, safe, and secure digital dollar.聽

Big questions remain. For example, how would a central bank guarantee that consumer purchases remain private while building in enough transparency to track criminal financial activity? Will digital coins be mined (created) in an energy-intensive way like bitcoin, which consumed more electricity than Norway last year, or use other protocols that require far less computer power?聽

鈥淭here hasn鈥檛 been too much effort put into upgrading the underlying technology behind bitcoin,鈥� says 海角大神 Fioravanti, chief marketing officer and point person for blockchain technology strategy at Mad Energy, a clean-energy company. 鈥淚t鈥檚 old and outdated, and unless a major change is made to upgrade the technology, 鈥� people may move to better technologies that are much more futuristic.鈥�

Then there鈥檚 the recent plunge in bitcoin and Ethereum, which has dented confidence in cryptocurrencies. What happens if one of these giants, on which layers of other crypto products are based, should collapse?

鈥淏ecause there鈥檚 no intrinsic value, as people begin selling, there鈥檚 no place to go except zero, because there鈥檚 no collateral to sell,鈥� Thomas Vartanian, executive director of the Financial Technology & Cybersecurity Center, warned at the American Enterprise Institute forum. 鈥淪o it starts out as an incredibly high-risk endeavor. And that鈥檚 fine. That鈥檚 absolutely fine. And it may be the future. But the problem is that we鈥檙e dealing with something that is highly unregulated and basically an analog of the Wild West.鈥�

Whether wild or increasingly regulated 鈥� as some in Congress are weighing via legislation 鈥� the future of money at least in the medium term could turn out to be crowded.

鈥淚 don鈥檛 think cash will completely disappear,鈥� says Andy Long, chief executive of White Rock Management, a Swiss-based bitcoin mining firm that鈥檚 expanding to the U.S. 鈥淚 don鈥檛 think the dollar is going away. I think there will be a dollar [digital] currency. I think bitcoin is not going away, as well. And they鈥檒l coexist.鈥�